For many years, most
Indian developers’ portfolios were dominated by residential projects, and many
dedicated only a miniscule percentage to the office asset class. Reasons for
this preference included:

· The
larger investments needed in office projects for as long as the developer
wanted to lease them out compared to residential projects, where regular sales
generated the required cash flow.

· Reduced
office demand due to a slower economy until a few years ago

· The
relatively-easy availability of funding for residential projects thanks to
investors

Given the above
circumstances, developers naturally preferred residential projects over
commercial. However, in the last few years as the economy picked up pace and
companies went bullish on their commercial real estate demand as well as
expansion plans, capital values of commercial spaces appreciated faster than
residential.

As the Real Estate
Regulation & Development Act (RERA) kicks in, many developers are now
shifting their strategy towards building more office projects. Also, with real
estate investment trusts (REITs) set to launch in India this year, developers
realize that this asset class can also continue to give them better dividends
in the future, and that they can capitalize on capital value appreciation when
they exit.

Resultantly, the focus
is changing to either having more office projects in portfolios – or, as is the
case with a select few developers, change focus from residential to commercial.
For example, recent media reports pointed out how a Bengaluru-based developer
that had focused largely on residential projects so far is moving heavily into
commercial real estate development with plans to develop Grade A office space
of about 5 mn sft in the next couple of years.

Given the low office
supply vis-à-vis demand in the IT and technology hubs of Bengaluru, Hyderabad
and Pune, developers are finding these markets very lucrative. In Delhi-NCR
too, a couple of developers who are better known for their residential projects
have now ventured into commercial realty. The financial capital of Mumbai is
not left behind in this trend, and several developers have shifted their sights
to building and leasing out office space in order to cater to the soaring
demand.

Premium developers in
Mumbai’s crowded residential space have been reportedly drawing up big
expansion plans to increase their office footprints. Even the largest developer
(by sales) in India is planning to develop a significantly high volume of
office space – apart from a retail development in Mumbai and a big warehousing/
logistics facility (factoring in the post-GST demand surge) over the next five
years.

The trend is also
visible by looking at the forecast office space supply through 2019 and then
through 2021. At a pan-India level, total stock of the country is forecast to
reach about 600 mn sft by end-2019 from 480 mn sft (as of
1Q2017). It is expected to reach about 660 mn sft through 2021. This
number could see a further hike as a lot of new office projects are announced
during 2017-18 and get constructed through 2021.